Market News

Fitch Ratings - London - 20 Dec 2023: Fitch Ratings has affirmed Ecobank Transnational Incorporated's (ETI) Long-Term Issuer Default Rating (IDR) at 'B-' and Viability Rating (VR) at 'b-' and removed these ratings from Rating Watch Negative (RWN). The Outlook is Stable. ETI's Government Support Rating of 'no support' is unaffected. A full list of rating actions is below.

The affirmation reflects ETI's continuing compliance with group minimum regulatory capital requirements following the devaluation of the Nigerian naira and Fitch's expectation that, although capital buffers remain thin, would continue to remain compliant in the event of a further material devaluation of the naira.

The affirmation also reflects Fitch's view of receding refinancing risks in respect of large upcoming bank holding company (BHC) principal repayments in 2024 and 2025. This considers ETI's maintained capital compliance, after having recently secured significant funding and our expectation that further funding will be secured imminently.

KEY RATING DRIVERS

ETI's IDRs are driven by its standalone creditworthiness, as expressed by its VR of 'b-'. As a BHC, ETI's VR is notched down once from the group VR of 'b' due to very high common equity double leverage (end-3Q23: 177%).

The group VR considers a leading pan-African franchise, strong revenue and geographical diversification, improved asset quality, healthy operating profitability, and a strong funding and liquidity profile. These considerations are balanced against the group's heightened exposure to foreign-exchange (FX) risk, modest capital buffers for its risk profile and some funding pressures, albeit manageable after funding being secured to meet upcoming BHC debt repayments.

High Double Leverage: ETI's VR is one notch below the group VR, reflecting a higher failure risk at the BHC due to very high common equity double leverage.

High Exposure to Volatile Sovereigns: Operating conditions are negatively influenced by rising sovereign debt sustainability risks across sub-Saharan Africa (SSA). Nigeria (B-/Stable) and Ghana (RD), which are two of the group's largest markets (end-2022: 32% of total assets), have both been downgraded in recent years, with Ghana defaulting on local- and foreign-currency (FC) debt in 1Q23. Geographical diversification mitigates sovereign risks, including high exposure to sovereigns rated 'B-' and below.

Strong Pan-African Franchise: The group had banking subsidiaries spanning 33 SSA countries and assets of USD26.6 billion at end-3Q23, making it one of the largest banking groups on the continent outside of South Africa. Strong revenue diversification is supported by a broad geographical footprint and high non-interest income (9M23: 43% of operating income).

Large FC Translation Losses: ETI is exposed to the depreciation of SSA currencies through its equity investments in subsidiaries because its reporting currency is US dollars. The depreciation of SSA currencies (in particular the Nigerian naira, Ghanaian cedi and CFA franc) led to large FC translation losses through other comprehensive income in 9M23 that significantly exceeded net income, resulting in a comprehensive loss of USD236 million (equivalent to 12% of total equity at end-2022). The impact of FC translation losses on capitalisation is mitigated by risk-weighted assets (RWAs) deflating in dollar terms.

Sovereign Exposure Constrains Asset Quality: ETI's impaired loans (Stage 3 loans under IFRS 9) ratio increased to 5.6% at end-3Q23 (end-2022: 5.2%), which we expect to increase further in 2024. Specific loan loss allowance coverage of impaired loans declined to 49% at end-3Q23 (end-2022: 53%). Asset quality has been weakened by rising sovereign risks due to large holdings of sovereign fixed-income securities.

Healthy Operating Profitability: Operating profit improved significantly to 4.6% of RWAs in 9M23 (2022: 3.2%), primarily due to a wider net interest margin benefitting from rising interest rates. Fitch however expects FC translation losses to remain large in 2024 due to naira weakness.

Limited Capital Buffers: ETI's common equity Tier 1 (CET1) ratio declined to 9.2% at end-3Q23 (end-2022: 9.7%) due to the large FC translation losses, leaving only a limited buffer over its current regulatory minimum requirement (8.5%). The ratio remains low compared with SSA peers' and is modest for the group's risk profile.

Manageable Upcoming Debt Repayments: ETI's funding profile benefits from a high percentage of current and savings accounts and low depositor concentration. Fitch believes ETI will be able to leverage on its strong relationships with development finance institutions and utilise group liquidity in refinancing the large amount of BHC debt maturing in 2024 and 2025.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

ETI's VR and IDRs could be downgraded if large FC translation losses through other comprehensive income, including those that would stem from a further naira devaluation, result in a breach of regulatory capital requirements without near-term prospects for recovery.

ETI's VR and IDRs may also be downgraded if common equity double leverage increases materially from current levels due to the naira devaluation, depreciation of other SSA currencies or capital injections into subsidiaries, which could result in a widening of the notching between the group VR and that of the BHC. ETI's VR and IDRs are also sensitive to reduced prospects for refinancing large upcoming BHC maturities.

ETI's VR and IDRs are sensitive to sovereign downgrades in its key markets, specifically Nigeria, or increased exposure to sovereigns rated 'B-' or below.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

ETI's VR and Long-Term IDR could be upgraded on a reduction in common equity double leverage below the 120% threshold on a sustained basis.

ETI's VR and Long-Term IDR could also be upgraded on significant improvement in operating conditions that accompanies a material reduction in its exposure to structural FX risks and reducing FC translation losses.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

ETI's senior unsecured notes are rated in line with its Long-Term IDR because, in our view, the likelihood of default on these reflects that of the BHC. The Recovery Rating of these notes is 'RR4', indicating average recovery prospects.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

ETI's senior unsecured debt rating is sensitive to a change in its Long-Term IDR.

VR ADJUSTMENTS

The business profile score of 'b+' has been assigned below the 'bb' category implied score due to the following adjustment reason: organisational structure (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.